Sunday, January 29, 2012

Four facts behind the Q4 US GDP miss

Source: LA Times

The big US economic news last week was that the GDP growth number came in below expectations.

LA Times: The gross domestic product rose at a 2.8% annual rate in the fourth quarter as consumers bought more cars and other goods, the Commerce Department said Friday. That was below the 3% figure many analysts had projected. But it was up from a feeble 1.8% the quarter before.

However it is worth noting that the headline number does not tell the full story. Here are four facts behind this GDP miss that should be considered:

1. The nominal GDP (vs. the real GDP), which is an important indicator of corporate profit growth was up 3.2%. Many believe that we need 4.0% nominal GDP growth to maintain robust corporate profitability growth. In that sense the nominal GDP number was even more disappointing.

2. A great deal of the GDP growth came from inventory build.

LA Times: More than half resulted from businesses increasing their stockpiles of products rather than from sales of goods and services, which reflect actual demand.

This is not great, because inventory builds are less likely to be repeated soon. This bodes poorly for GDP growth in the current quarter.

3. The Q4 inflation measure used to convert the nominal GDP into the real GDP was quite benign, only 0.4%. That may explain the Fed's complete comfort with further accommodation.

4. The biggest drag on growth was a 3.7% quarterly decline in government spending. This is clearly a good indication from the government budget deficit's perspective, but is also a sign of what is to come as the US embraces more austerity measures. Without the impact of declining government spending, the nominal GDP measure was actually 4.9% (vs. 3.2% with government spending included).